Joining the dots on electricity

Lock down 1

The depressing sameness of the days for those locked-in as the epidemic rages, is relieved only by the 24X7 flow of electricity – the juice that keeps us all connected, informed, entertained and as summer advances, in air cooled or conditioned comfort.

Thank God its not the power deficient noughties!

Imagine being locked-in for two months or more, minus regular power supply in the early noughties. Riots, severe business disruptions, violent family disputes and depression would have been the unfortunate end results. All these are kept at abeyance today with digital replacing the physical connect for medical help, student lessons, group chats, memorials, work meetings and of course shopping – the elixir of a modern economy. 

Surplus power capacity – wasteful but welcome

Even before the woes of Covid-19 took center stage, we had an abundance of generation and transmission capacity due to undershooting of projected industrial demand; an excess of entrepreneurial exuberance by developers who bought into the double-digit, economic growth story and banks which lent recklessly, completely ignoring the financials of a bankrupt distribution system. 

In April 2020 peak demand for electricity was just 133 Giga Watt (GW) 24% lower than in the same month last year of 176 GW, the reduction being due to locking out industrial and commercial enterprises. 

But even in June 2019, the “availability” of capacity – calculated at 196 GW out of the installed capacity of 357 GW – after allowing for maintenance and break down stoppages, was 8% more than peak demand in the hottest month of the year. Energy demand was fully met with a short fall of only 0.4% concentrated in fringe markets like J&K, North East and the Andaman Islands. 

The real retail demand for power is suppressed by cash deficit distribution utilities

A caveat here for those who were dripping with sweat in the face of regular brown outs or “load shedding” even as aggregate demand was met by aggregate supply and the grid frequency remained stable.  “Demand”, in the Indian context, is the volume of energy or peak capacity, distribution utilities (DISCOMS) commit to buy on a day ahead basis, depending on their cash availability. This is likely much lower than the volume final customers wish for. 

Gas based generation waits for the good times when we may be able to afford it

But generation capacity does exist to meet the full customer demand. Less than one fifth of the gas capacity of 25 GW is being used. Cash starved DISCOMs do not have the financial resources to buy the more expensive power generated from imported LNG if industrial and commercial demand is not buoyant.

Three fourths of DISCOMS are bankrupt

distribution wires

At the nub of the problem is the continuing poor efficiency of most publicly owned DISCOMs barring seven honorable exceptions – the four DISCOMS in Gujarat, two out five in Karnataka and the Uttarakhand DISCOM- all of which were rated A+ in the 2017-18 rating cycle by CARE/ICRA (https://www.pfcindia.com/Home/VS/25)

Reducing high ATC loss – better housekeeping needed

The elephant in the room is high technical and commercial loss (ATC). Admittedly the median ATC has decreased from 26.6 % in 2010-11 to 20.6 % a significant improvement. But the near-term target of 15% remains elusive except for nine of the forty-one DISCOMs. But none is near the normative loss of 5% per international standards. 

The value of the energy lost due to not achieving the ATC target, valued at an average cost of energy of Rs 5.20 per unit, comes to around Rs 340 billion. On March 31, 2019, the outstanding dues of DISCOMS to central generators (CPSUs) beyond 60 days were Rs 200 billion. 

These outstanding liabilities could have been avoided by achieving the ATC loss targets. Sadly, the problem is one of political economy rather than technology, since around one fifth of DISCOMS have reached the targeted level. 

Privatisation of DISCOMS a “far pavilion” play

Privatizing the DISCOMS is a neat, medium-term objective, once we are out of the global downturn. Potential investors will only be attracted by rapid growth in industry, commerce and paying retail customers. Currently, the financial stress in DISCOM finances can only widen even further as the lock down is extended. An in-situ solution must be found. 

Temporary discount on the cost of CPSU power supply

Another option is to socialize the loss of the DISCOMs by beggaring the Union government CPSUs -NTPC and PowerGrid. Their owners the Union government could make them offer temporary discounts on the cost of power supplied by them. 

Both are listed companies with profits before tax of Rs 200 billion and Rs 115 billion, respectively. Their tariffs are determined on normative basis by the Central Electricity Regulatory Commission. The signals sent out by such “strong arm” administrative action slashing profits, would be extremely negative for future private investment in power. Also bowing to local populism simply begets more local irresponsibility. 

Reduce the Green Cess  & the excess freight charge by IR on coal

An alternate demand is for the Union “Green Cess” on dirty coal, which accrues only to the Union government, to be reduced. Higher than normative cost freight charges levied by Indian Railways is another pool of resources. However, this money is already used to fund a host of environment improving schemes, so it would be robbing Peter to pay Paul, though this is a better option than robbing the CPSUs

Union government proposes a legislative fix

Finger pointing between the states and the Union is unlikely to result in a solution. The Union government has proposed an Electricity (Amendment) Bill 2020 which makes it compulsory for the state level electricity regulators to determine retail tariffs on normative cost basis. State governments could then compensate any class of customers by putting cash in their hands directly rather than passing it through the tariff setting mechanism, as presently.

The proposed change is technically sound and designed to tie the hands of the state level regulators who find it difficult to resist political pressure by the state governments who appoint them. But it presents significant political economy challenges. 

Consider that in well-off Delhi, the private DISCOMS, supply electricity to customers using up to 200 units per month, free of energy charge. In most states agricultural load is charged at nominal rates which does not even recover the fuel cost of supply. 

RE the great disrupter…but not till 2030

Renewable Energy (RE) could disrupt the industry by lowering the energy supply cost. The stand alone cost of solar power has crashed to Rs 2.4 per unit at the grid, compared to Rs 4.5 for coal based mega power plants. This is good news for the blue skies, oil substitution and smaller carbon footprint we all wish for. But we must wait till at least 2030 before battery storage can take the intermittency out of RE supply. 

Till then we are doomed to lurch through periodic “final settlements” of DISCOM debt – there have been three so far since 2000- with the Union and State governments sharing the tab for poor management and unsustainably populist, local decision making. 

A free lunch for DISCOM staff, conniving customers and political gains for the party in power, all come at the cost of the long suffering, law abiding, honest customer. Some nudges to elicit better behavior are desperately needed. 

Also available at TOI blogs May 9, 2020 https://timesofindia.indiatimes.com/blogs/opinion-india/joining-the-dots-on-electricity/

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